NEW DELHI (Reuters) - India increased spending on infrastructure by 23 percent in Monday's budget and raised the limit for foreign institutional investors in corporate bonds for infrastructure, in a bid to overhaul the sector.

The pace at which India constructs power plants, highways and ports has for years lagged the demand of the world's second-fastest growing major economy, eating into growth and helped keep inflation uncomfortably high.

The government has of late talked up the need for spurring infrastructure growth and announced a $1.5 trillion spending splurge over a decade for the sector, though it has often fallen short of its funding and construction targets.

In his budget speech for the 2011-12 financial year, Finance Minister Pranab Mukherjee announced several initiatives -- some new and some long-pending -- and increased allocation on the sector to 2.14 trillion ($47 billion).

Top of the billing of new measures was a move to raise the limit for foreign institutional investors to invest in corporate bonds for infrastructure to $25 billion from $5 billion.

"For infrastructure, the budget is positive. You can argue it is not sufficient, but it's positive," said D.K. Joshi, principal economist at CRISIL.

"Given the number of requirements of the infrastructure sector you need to push it even harder, but at least the steps are positive."

The hike in investment limits and the announcement of long-promised infrastructure debt funds pushed up shares of firms such as engineering and construction firm Larsen & Toubro.

However, the corporate bond market may not see a large influx of foreign funds into infrastructure immediately, bankers said, due to a minimum tenure of five years for investment and lack of top rated infrastructure lenders.

"There is nothing much for the capital markets because we were expecting a major focus on sectors like infrastructure," said Ambareesh Baliga, vice president, Karvy Stock Broking Ltd.

"Though the budget does have measures such as creation of infrastructure debt funds, the focus is not as great as we had expected."

The government announced higher credit for infrastructure projects via the state-run India Infrastructure Finance Company Limited (IIFCL) and gave tax incentives to cold storage chains to drive construction of new facilities.

India has been at pains to keep pace with building power plants to plug electricity shortages. Domestic manufacturers have long balked at the increasing reliance on cheaper, Chinese-made power equipment that was bolstered by favourable import duties.

Mukherjee slashed duty on domestic power gear manufacturers such as Bharat Heavy Electricals Limited to make big-ticket plants more competitive against foreign brands, mainly from China, that have become assertive in the Indian market.

Caught between beefing up its local manufacturing industry and slashing power shortages, New Delhi has so far resisted pressure to impose hefty import taxes on foreign-made equipment for so called Ultra Mega Power Projects (UMPPs).

"It (the excise duty cut) will correct the anomaly that existed between Indian suppliers and international suppliers who get customs duty exemption on power equipment supplied to mega power projects and will create a level-playing field for both," said Vardhan Dharkar, CFO, KEC International.

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